Oil expert: Summer demand will be key to industry’s performance

Apache operations in West Texas. Houston’s Kinder Morgan said Thursday it’s ready to move forward with its $1.7 billion gas pipeline from West Texas to the Corpus Christi area after signing on Apache Corp. as a major customer. less

Apache operations in West Texas. Houston’s Kinder Morgan said Thursday it’s ready to move forward with its $1.7 billion gas pipeline from West Texas to the Corpus Christi area after signing on Apache Corp. ... more

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Apache operations in West Texas. Houston’s Kinder Morgan said Thursday it’s ready to move forward with its $1.7 billion gas pipeline from West Texas to the Corpus Christi area after signing on Apache Corp. as a major customer. less

Apache operations in West Texas. Houston’s Kinder Morgan said Thursday it’s ready to move forward with its $1.7 billion gas pipeline from West Texas to the Corpus Christi area after signing on Apache Corp. ... more

Photo: Courtesy /Courtesy

Oil expert: Summer demand will be key to industry’s performance

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A prominent oil expert says the summer driving season will be a key indicator of the health of the global oil industry.

“A critical milestone is going to be when we all wake up a week after Memorial Day with gasoline demand higher than last year, or not, and by how much,” Amy Myers Jaffe, executive director of Energy and Sustainability at the University of California at Davis, said Wednesday by phone.

Jaffe was citing the holiday weekend that marks the unofficial start to the summer holiday season, which typically is when U.S. demand for gasoline is at its highest levels of the year.

Higher demand would indicate burgeoning oil supplies could be whittled down, helping to fix the supply-demand imbalance that has plagued the industry for more than two years. Low growth could plunge oil markets back into lower prices as resilient supply continues to outstrip demand.

Her comments coincided with the release of the Federal Reserve Bank of Dallas’ first-quarter energy survey that showed oil and gas executives believe the Permian Basin is set to continue “increasing, increasing, increasing.”

The consensus of oil executives in the Dallas Fed’s district is that the Permian Basin is “hot.” The district covers southern New Mexico, Texas and northern Louisiana.

Billions of dollars have been spent by oil and gas companies in the Permian as they attempt to grab the best acreage in the area, which some consider to be the “crown jewel” of the shale oil industry. Some deals have seen land values grow to $60,000 an acre.

The survey — conducted between March 15 and 23 with respondents from 78 exploration and production companies and 75 oil-field service firms — calculated its business activity index had increased slightly to 41.8 from the fourth quarter’s 40.1, indicating continued strong business for oil companies. That finding is in line with data from the U.S. Energy Information Administration that shows the U.S. shale oil industry has increased oil production by 719,000 barrels a day since September.

“I think the train’s already left the station with 2017 shale production,” she said. “There’s no mechanism to tell people to invest slower or produce less,” Jaffe said of the U.S. oil industry. “People go in there, they have shareholders and investors, they have to recover as much oil as possible in as little time as possible to make their investment worthwhile.

“The Saudis will make room, or they won’t,” she added.

Saudi Arabia and other members of the Organization of Petroleum Exporting Countries have cut more than 1.2 million barrels of oil production since January to boost oil prices after they fell from a high of $107 a barrel in June 2014 to $26 a barrel in February 2016.

Jaffe says Saudi Arabia, the de facto leader of OPEC, is caught between trying to rebalance an oversupplied crude market and funding its economy, which has lost tens of billions of dollars in the last few years. The moves made by U.S. shale have made Saudi Arabia’s job more difficult.

High oil production and sluggish demand growth has contributed to crude oil inventories within the U.S. standing at a record 534 million barrels this week, according to the Energy Information Administration. But a drop of 3.7 million barrels in the nation’s gasoline inventory helped boost the price of the domestic benchmark, West Texas Intermediate, which ended Wednesday up 2.4 percent at $49.51.

Exploration and production firms said in the Dallas Fed survey the average breakeven price for new wells was $46 in the Permian’s Midland Basin, while Oklahoma’s Scoop and Stack oil fields had a breakeven price of $47 a barrel. South Texas’ Eagle Ford Shale came in third at $48.

The first-quarter report marked the first time the Dallas Fed asked oil and gas executives for year-end price forecasts for WTI. The average forecast price was $53.49 per barrel, with responses ranging from $30 to $65 a barrel.

The survey also asked for production forecasts. Respondents said that in the next year, Permian production could range from 2 million barrels a day — the current rate — to 4 million barrels a day. In the next five years, that estimated range widens from 2 million to 5.5 million barrels a day; and in a decade, 2 million to 7 million barrels a day.

But one anonymous respondent told the Fed predicting future production levels was difficult.